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A few charts call into question the current euphoric rally in
most global stock markets.

The growing consensus among technical and fundamental
analysts is that the stock market has bottomed for the year and
is now in full rally mode. There are five basic
arguments in favor of a "real thing" rally that runs higher for
months to come:

1. Stocks almost always rally in November-December, and end in
positive territory in the 3rd year of the presidential cycle
(2011)

2. September data in the U.S. was mildly positive, fears of
recession have faded

3. Corporations like Google and
Catepillar are posting blow-out earnings

4. Europe is finally solving its debt crisis in a comprehensive
fashion

5. China is still growing and thus is still the tugboat pulling
the global economy ahead

Recession is a binary: the U.S. is either in a recession or it
isn't. ECRI says it is, the stock market is assuming it isn't.
Only one can be correct.

Question: if the U.S. is already in recession,
how can that be positive for incomes, tax revenues, sales and
ultimately, corporate profits and stock valuations? Bulls have to
answer this question; ignoring it is not an option for any
risk-conscious investor.

2. China's stock market has failed to join the global euphoria:
The Shanghai Indicator
(dshort.com) has fallen to multiple critical support levels and
is still declining.

Question: if China's growing so wonderfully,
then why isn't it own stock market soaring? Perhaps the data
supporting the official story of 8-9% growth (as usual) is more
"perception management" than reality. If it was real, then why
aren't Chinese stocks soaring along with other global markets?
Once again, Bulls have to explain this disconnect; ignoring it is
not an option for any risk-conscious investor.

3. Despite its 7% rally yesterday, copper is in a clear technical
decline. Given its historical role as leading indicator of stock
market trends, then this suggests global markets are due for a
massive decline, not a rally. Bulls have to explain this
disconnect; ignoring it is not an option for any risk-conscious
investor.

Here is a chart of copper, courtesy of The Chart Store (subscription required to access a
vast array of financial and economic charts):

4. If the E.U. solves its debt problems by effectually
transferring bad bank debt to the sovereign balance sheets of
Germany, France, Finland, et al., then taxpayers will see their
incomes significantly reduced by austerity and higher taxes, in
both debtor and "savior" nations.

Incomes and GDP are already declining in the weaker EU nations
which have supported Germany's export-dependent economy by
importing billions of euros of goods from Germany. What happens
to German exports in Europe as its customers' economies contract?

Question: how can lower incomes, and thus lower
sales and lower profits, possibly be supportive of higher stock
market valuations? There is no free lunch; the hundreds of
billions, and possibly trillions, of euros needed to save the
banks and bondholders from losses will come out of the pockets of
taxpayers and recipients of State/government payments. That
necessarily means those taxpayers/recipients will have less
income and thus less money to spend. More government revenue will
be devoted to interest payments, and so less will be available to
transfer to citizens.

Question: will the supposed benefits of saving
large European banks via massive taxpayer-funded bailouts offset
the declines in personal income which the bailout will require?
How is a dramatic decline in personal income supportive of higher
profits and higher stock valuations? Bulls have to answer this
question; ignoring it is not an option for any risk-conscious
investor.

5. Technically, the chart of the S&P 500 has some bearish
elements:

-- A classic megaphone pattern has emerged, a pattern which is
usually a topping formation.

-- The current rally could be forming the right shoulder of a
long-term head-and-shoulders top. If we examine the "head," we
discern a classic head-and-shoulders pattern; the break of the
uptrend set up a test of the neckline, and now the current rally
is the right shoulder of a multi-year top.

A decisive rally above 1,350 to new highs would of course negate
this pattern.

There are also some similarities to the 2008 time frame
just before the meltdown. For example:

6. The market's valuation is still extremely rich in terms of the
nation's GDP:

7. Perception management. Since the Powers That
Be have publicly proclaimed the stock market is their chosen
proxy of the American economy, then we have to ask: would it be
in the interest of the Status Quo to engineer a rally? The answer
is obviously yes; a decline in the market would negate the
official happy story that everything's fixed, there is no
recession, etc.

Then we have to ask: what's the best way to engineer a rally?
Answer:

A. Crank the market higher in light-volume periods such as
pre-market and the last 30 minutes of trading. Evidence: most of
the big gains of the past three weeks have occurred in pre-market
or the last 30 minutes of trading.

B. Manage perceptions of future Federal Reserve/Central Planning
"easing" via rumors of yet more buying of mortgage-backed
securities, speeches by top toadies discussing more "easing"
programs are in the works, and all the other usual techniques of
Central Planning propaganda.

Technically, this rally hasn't shown the big volumes of "real
rallies." That in itself should spark some skepticism about the
nature of the rally.

Bonus chart: As The Chart Store's Ron Greiss
notes on this chart, analog charts are interesting but not
necessarily predictive. Nonetheless, they offer potentially
valuable "food for thought." This one is worth studying, as the
present has tracked the 1907 chart to an uncanny degree. We can
posit that the only reason the market didn't roll over last year
was the Fed's "surprise announcement" of QE2. Perhaps this
extend-and-pretend strategy will be followed by the decline
witnessed in the 1907 chart.

For a similar chart, please see Doug Short's Real Mega-Bears Chart which
overlays the current SPX against
the Depression-era Dow and the post-crash Nikkei.

Has perception management replaced fundamentals as the
foundation of all stock market rallies? Investors with
an eye on risk would be well-served to ponder the question, and
its many implications.